No Addition u/s 41(1) of the Income Tax Act as assessee acknowledged liability and reflected the same in its books of account: ITAT [Read Order]

The Income Tax Appellate Tribunal (ITAT) Delhi bench held that Addition under Section 41(1) of the Income Tax Act, 1961 should not be invoked since the assessee had acknowledged liability and reflected the same in  its books of Account.

Assessee, Pelican Tobacco India Pvt. Ltd.'s income was scrutinized through Computer Aided Scrutiny Selection (CASS) after filing the return. During the course of assessment proceedings, the assessee was asked to furnish the address and confirmation of creditors from credit amounting to INR 66,84,815/- was obtained. However assessee furnished details of only one creditor.

Subsequently, the Assessing Officer (AO) had issued notice under Section 133(6) of the Income Tax Act to the creditors but of no avail. Hence, the AO treated the sum of INR 58,35,246/- as cessation of liabilities  under Section 41(1) of the  Income Tax Act, and assessed the income of the assessee at INR 19,94,035/- after giving set off of loss of INR 38,41,211/-. 

Aggrieved by this, the assessee filed an appeal  before the Commissioner of Income Tax-Appeals [CIT(A)], who partially allowed the appeal. Therefore the assessee filed a subsequent appeal before the tribunal.

Before the bench, R.P.Mall, counsel for the assessee submitted that as per the Section 41(1) of the Income Tax Act, cessation of liability may occur either by reason of it becoming unenforceable in law by creditor coupled with debtor's intention not to honour his liability, or by a contract between parties or by discharge of debt.

Thus, since the assessee  has reflected the outstanding liability in its books of account and has acknowledged the liability and there is no evidence that such liability has ceased during the year, addition made by the AO of Rs. 7,02,059/- in respect of M/s Green Press Pvt. Ltd. by invoking the provisions of Section 41(1) of the Income Tax Act was unsustainable in law.

Further, the AO did not make any enquiry in respect of the lenders. Further assessee successfully demonstrated identity and creditworthiness of lenders and genuineness of transaction regarding all four lenders.

R. Mohan Reddy, Counsel for the revenue,  submitted that  “assessee could not furnish confirmation from the creditors. It was incumbent upon the assessee to prove the existence of credit. In the absence of such credible evidence, AO had rightly made addition treating it as cessation of liability”.

It was observed by the tribunal after considering various decisions that merely because the liability is barred by limitation, it does not cease to be a debt.

Thus, because the liability is barred by the period of limitation the same would be treated as income and added under Section 41(1) of the Income Tax Act cannot be accepted.

After considering the facts submitted by both parties, the single member bench of Kul Bharat, (Judicial Member) directed to modify the assessment order passed by the assessing officer and deleted the addition made under Section 41(1) of the Income Tax Act.

To Read the full text of the Order CLICK HERE

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